Thursday, March 10, 2016

Housing: Part 125 - Rent Control as Closed Access

A few days ago, I was wondering why Yelp would still have operations in San Francisco that were staffed by low skilled workers. I suspect rent control has something to do with it. In the city of San Francisco 3/4 of rental units are under rent control!

Rent control is simply another form of Closed Access policy. It is actually a much simpler version than the restrictions on new building. The economic rents that flow to real estate owners from building restrictions have to do with a complicated set of expectations. By limiting new housing, current owners control a larger share of the future expected housing stock of the city. The future value of the total housing stock of the city will rise whether new housing is built or not. Housing demand is relatively inelastic. For nearly half a century, aggregate US spending on housing has remained at about 18% of personal consumption expenditures, even as the relative level of real housing has dwindled.

But, in localities like San Francisco, demand is even less elastic. Before the year 2000, rent affordability in San Francisco ranged between 25% and 30% of median income. In the 15 years since, largely as a result of not building, rent in San Francisco now takes more than 45% of the median income, according to Zillow. By reducing the relative housing stock, San Franciscans spend more on housing. So, the idea that the total value of San Francisco real estate may be relatively unresponsive to changes in the real housing stock is the conservative estimate. If San Francisco built enough housing simply to revert to the supply context of the mid 1990s, the total value of all real estate, including the newly built real estate, would be less than the total value of San Francisco today, without that additional real estate. This is a strange mathematical outcome, but it is strongly suggested by the data. (Here is a link to Zillow San Francisco apartments page.)

The economic rents from keeping that new housing stock off the market are earned month by month, but the expected value of those rents raises the current market value of the real estate immediately. So, current market values are a direct result of limited access, but how that value is attained is a bit of a conceptual journey.

On the other hand, a renter in a rent controlled apartment is simply receiving a transfer each month from the landlord as a discount on the market value of the unit. Rent control is simply a way to capture Closed Access economic rents for the tenant instead of capturing them for the landlord. Tenants tend to be more popular than landlords, so these economic rents are usually proudly defended. But, if Closed Access policies are the problem, then we should be just as set against this sort of collection of rents as we are when the owner collects them.

And the incivilities created by Closed Access policies are quite clear in the countless stories of San Francisco/Silicon Valley tenants in search of apartments with affordable rents. The lack of available rent controlled units is usually bemoaned by the essayist, as if they expect price ceilings to lead to a surplus. The transfer is usually treated as a transfer from the landlord to the tenant, and a certain philosophical point of view tends to cheer that sort of transfer. But, it is just as much of a transfer from the potential tenant who would have gladly paid $50, or $100, or $2,000 more for the same unit. The tenant in a rent controlled apartment is getting a transfer from the essayist that was working for Yelp for $1,500/month while paying $1,245/month on rent for an apartment 30 miles away.

And, I think that might be a clue about why there hasn't been more outsourcing. For workers with below market rent, costs aren't as high as market measures would suggest. So, limits to new development have led to a stagnating housing stock, which feeds a complicated mix of economic rents to Silicon Valley firms, highly skilled workers, and landlords. But, rent control effectively pulls some large percentage of the housing stock out of reach of new high skilled workers. Rent control imports Phoenix costs into the San Francisco housing market. Yelp could keep that low-value job in San Francisco because rent control brought Phoenix cost levels to some of their workers.

Apparently, Talia Jane wasn't one of them. Or, maybe, depending on the set of rules, she just had to take on the high costs to get in, and below market rents would only build as her tenure lengthened. In many cases, it seems as if these policies are a sort of benefit to seniority, as Closed Access policies usually are - whether it is limiting access to a labor market, or a VC community, or a trade union, or housing.

Of course, Ms. Jane blames Yelp for her financial woes, but the reason her finances are so far from manageable is more likely because of the disconnection from reality that Closed Access creates. Surely we can't expect Yelp to survey their staff about everyone's rent expense and then pay thousands more each month to some workers just because they lost the rent lottery. Sadly, there seem to be many people who don't understand what an absurd proposition that would be, and how if that was the solution it would defeat the purpose of Closed Access policies to begin with. What would be the point of saving $2,000 in rent if your employer would have been expected to give you a $2,000 subsidy to pay it?

So, effectively, rent control cuts the size of San Francisco in half. Half of it is pretend-Phoenix and half is costly, real San Francisco. That just makes the problem of finding room for the in-migrants twice as big, the effect on market rates twice as strong, and the speed with which this all comes to a head twice as fast. Rent control slows down the migration pattern and the income-based geographical segregation that Closed Access policies create. It is a way to treat the symptoms while making the disease worse.

4 comments:

The transfer to tenants in rent control is also not always directly from the landlord. In many cases, the landlord receives either direct rent subsidies or tax subsidies to make the required return on the property still fit their needs. They still get their rents. So in many cases rent control is a more general transfer of wealth in the community.

This happens in Tucson in a big way, big for Tucson at least. There are owners whose entire model is built on "affordable housing". They pay more for the land, and build more expensive buildings, than a traditional builder would, but rely on federal, state, and city subsidies, as well as fast track (official or not) through the approval process. So a project that would never work for the expected costs and rents pencils out because of the political will to transfer money to lower income individuals and an unadvertised result is a similar transfer to the developers/owners.

Interesting. Here I think you are talking more about what would be recorded as transfers or subsidies in BEA income and production measures. In a way, I think these sorts of measures are a backdoor way of undoing the regressive tax policies that tend to float to owner-occupiers. This is one of the set of complex tax rules that I think could mostly be thrown out if we generally eliminated business income taxation, so that owner-occupiers would lose most of those advantages. Of course, I'm only speaking hypothetically. Even if that sort of simplification happened, the ink wouldn't be dry before we started screwing around with it again.

The cast of villains in closed access cities is large, including tenants who think rent control works, to policy-makers, and property zoners.

But this grabbed my eye:

"If San Francisco built enough housing simply to revert to the supply context of the mid 1990s, the total value of all real estate, including the newly built real estate, would be less than the total value of San Francisco today, without that additional real estate. This is a strange mathematical outcome, but it is strongly suggested by the data."

I suspect current property owners are on to this. Ergo, they are happy with zoning. They are politically powerful as well.

I suspect something else too: In Los Angeles, anyway, poor people are being pushed out of the city and into the desert. Crime is dropping, schooling needs, but retail sales tax collections rise etc. Hispanics are replacing blacks in many neighborhoods, and there may be almost no black neighborhoods in L.A. city proper in another 20 years.

So the same city officials who bleat about poor people are secretly happy to push poor people into Palmdale and Bakersfield.

After being educated by Kevin Erdmann, I consider property zoning perhaps the largest economic structural impediment in America today. It is followed by the archipelago of rural subsidies, and then the $1 trillion a year spent on "national security."

None of this is PC. Nobody ever wants to end property zoning, and national security spending is a sacred cow. Farmers and rural people have two senators in every backwater state, so that is fixed in stone. Think ethanol--10% of every gallon sold in the US and you have no choice.

But we can bash the minimum wage. It is this people earning $9 an hour who are holding America back. Or corporations, who make too much money.

Excellent design! Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence............